How is operating margin calculated?

Operating margin is a key financial metric that evaluates a company's operating efficiency and profitability. It is calculated by dividing income from operations by net sales. This ratio indicates how much profit a company makes from its core business activities before accounting for interest and taxes.

Using income from operations in the numerator focuses specifically on the revenue generated from primary business activities, excluding non-operating income and expenses. By dividing this figure by net sales, which represents the total revenue from sales after deducting returns, allowances, and discounts, the operating margin provides insight into how well a company is managing its operational costs relative to its sales revenue.

A high operating margin suggests that a company is efficient in controlling its operating costs, while a lower margin can indicate issues with cost management or pricing strategy. This metric is particularly useful for comparing companies within the same industry, as it highlights operational performance without the influence of financing and taxation decisions.